Bitcoin Cloud Mining Service Craters: How Can You Tell the Difference Between a Profit Maker and a Ponzi Scheme?

NEW YORK (InsideBitcoins) — Mining bitcoin has become a big ticket manufacturing game, played by operators with deep venture capital pockets. The days of desktop mining are all but gone. Instead, would-be home gamers are lured to “cloud mining” operations — a buy-in to collective mining farms, some claiming advanced supercomputing powered by “renewable hydroelectric power” and Polar plants cooled by sky blue Arctic air.

You buy all the hashing power you want, they do the rest. No need to buy expensive hardware with near-instant obsolescence. And forget the costs of electricity, hosting or maintenance.

It sounds particularly appealing to those looking to strike it rich in a cryptocurrency gold rush. But the hills are thick with thieves and thin margins.

One cloud mining pool went offline this weekend — and at least one other is gathering a growing number of disgruntled users.

No payouts here, just music and Morse code

Hashie.co – whose homepage was abruptly replaced by an alternate reality game comprised of music and Morse code – went dark after a growing number of complaints regarding missed payouts. The company launched just two months ago.

CloudHashing.com, another pooled mining operation, has faced questions about  missed payouts, as well. One user told Inside Bitcoins that he had been buying CloudHashing contracts since last January – after attending the Inside Bitcoins Conference in New York.

“The mining produced results every day in the first six months but began to get spotty in November when there were eight days of no new BTC being mined,” he told us. “Same thing in December. I have seen nothing in my account for eight days. Also, they stopped the revenue reinvestment plan in early December. There has been no communication to explain this.”

[Read More: What Is Bitcoin Mining?]

Our inquiry to PeerNova, the parent company of CloudHashing, raised a quick response from Emmanuel Abiodun, president and CCO of PeerNova.

“Because of the size of the bitcoin network, we have seen some significant time variances in block discovery by our service,” Abiodun told Inside Bitcoins. That variability in results has impacted regular payouts and returns, the company says. “To mitigate this, we will be moving our machines to alternate larger pools until our own pool size increases,” Abiodun added.

Such fragility in generating revenue has to be a concern for not only cloud mining consumers, but the pools themselves. Less than two weeks ago, PeerNova announced Series A equity and debt funding totaling nearly $9 million, led by Mosiak Partners. The company said the funding would be used to “accelerate its blockchain-based enterprise products.”

That could be interpreted as a pending pivot in their business plan, perhaps with a diminished focus on consumer cloud mining contracts as the company marshals its resources for the development of “multiple” commercial-based applications in the New Year.

Looking for ‘a cheat-proof’ scheme

But while CloudHashing customers may be mollified for the moment — and Hashie clients apparently left out in the cold — how can a consumer tell the difference between a pooled platform offering a true profit from one that is nothing more than a Ponzi scheme?

Cloud hashing is the easiest scam to run in bitcoin. Beware of promises of returns and large farms. Photos depict Potemkin Mining Farm

— Andreas (aantonop Team) (@aantonop) December 29, 2014

Gavin Andresen, lead developer of the bitcoin protocol and chief scientist for the Bitcoin Foundation, has been an outspoken critic of cloud mining for a while.

“I haven’t seen a good way to distinguish between an honest cloud hashing company that actually owns and operates hardware, and Ponzi schemes, where the company just pays out earlier ‘investors’ with bitcoin that they get from later ‘investors,’ Andresen told Inside Bitcoins.

“It is not clear that it is possible to come up with a cheat-proof scheme for a cloud hashing company to prove that they are honest; ‘proof of hashing’ schemes I’ve seen discussed could be tricked by renting some hashing power temporarily,” he added.

So, are the days of hooking up a PC with a couple of fans and an open window to keep the whole contraption cool, a thing of the past?

“I did a little bit of CPU mining way back in 2010 when I first heard about Bitcoin,” Andresen said. “I stopped because I hooked up a Kill-a-Watt meter to my computer and did the math: It was cheaper for me to buy bitcoins that somebody else produced than pay for the electricity to produce them myself.”

How to make money from bitcoin mining

Andresen said to make money in bitcoin mining, you’ve got to have an angle.

“My advice for individuals thinking about mining is the same now as it was back then: don’t do it unless you have some competitive advantage. If you have access to very cheap or free electricity, that is a competitive advantage, and you can probably mine profitably. Or if you have early access to cutting-edge mining ASICs that are more energy efficient. — or if you have access to very inexpensive ASICs.

“Bitcoin mining is a zero-sum game.”

“Bitcoin mining is a zero-sum game, so you are competing against everybody else who is trying to create them. You will only be profitable if you have some advantage over them. That was true in 2010, and it is still true today. There were a couple of times in between where people got lucky and got early access to cutting-edge hardware (first GPUs, then ASICs), but you shouldn’t count on being lucky.”

But Andresen added that there are exceptions to the rule.

“For example, it might make sense for you to mine bitcoins at a loss if you live in a country that makes it very difficult to purchase bitcoin, and you have no other way of earning them,” he says. “Or if you value your financial privacy very highly and don’t want to trust an exchange with your personal information, it might be worth it to you to pay more in hardware and electricity costs to mine your own bitcoins.”